Council Supports Keeping Participants in Retirement Plans

The 2014 ERISA Advisory Council examined recent movement of
participant assets out of defined contribution (DC) and defined benefit (DB)
plans—as plan distributions or rollovers into retirement accounts not covered
by the Employee Retirement Income Security Act (ERISA), such as individual
retirement accounts (IRAs) or other savings accounts.

The Council noted it heard considerable testimony about the
various factors terminating employees might consider in evaluating whether to
keep assets in an employer-sponsored retirement plan, take a cash distribution,
or roll assets into an IRA. According to the report, some factors participants
may wish to consider include:

The
plan’s fees versus the fees of an IRA;

Investment
vehicles offered in the plan versus another savings vehicle;

Availability
of loans;

Tax
considerations;

IRAs
are not subject to ERISA;

Protection
against creditors;

The
need for immediate cash; and

The
health of the participant.

In addition, the Council looked at considerations for plan
sponsors when deciding whether to encourage participants to keep assets in the
plan. According to the report, Robert Hunkeler, vice president of investments
at International Paper and a former chair of the Committee on Investment of
Employee Benefit Assets (CIEBA), indicated 90% of CIEBA members surveyed
(who primarily represent the investment functions at plan sponsors) indicated
that keeping participants in ERISA-covered DC plans after termination of
employment is a good idea because it will result in lower participant costs and
provide ERISA fiduciary protections. On the other hand, only around 60% of the
surveyed plan participants felt that their company wanted to keep participants
in the plan, and less than one-quarter of the plan sponsors had a program in
place to encourage retention.

Hunkeler attributed this difference more to the newness of
the concept than to opposition, as less than 10% of those surveyed felt their
organization would be opposed to the concept of employee retention in their
plan. He said the primary reasons for not having a retention program were that
“it was a low corporate priority and that there were concerns about fiduciary
liability and cost.”

The Council looked at notices required when a retirement
plan participant requests a distribution and the information available about
distribution options on certain websites. It offered communication steps for
plan sponsors to consider to encourage participants to stay in their plans and
for the Department of Labor (DOL) to consider in educating and encouraging plan
sponsors and participants.

“Based on the testimony and statements presented, it is the
Council’s view that participants need more information and advice to make
informed decisions about how to handle potential plan distributions and that
DOL can play a role in providing this information directly through its
educational programs and indirectly by encouraging plan sponsors to provide
educational materials to participants at various stages during their employment
relationship and beyond after employment has ended,” the Council wrote in its
report.

The Council noted that if employer-sponsored plans are to
encourage lifetime plan participation, they will need to include more products
and services geared towards retirees in the decumulation phase of saving.
Lifetime income options, such as annuities, will likely play a more prominent
role in the future. The Council said it believes additional guidance to
sponsors about lifetime income, including an updated DC plan annuity safe
harbor, would result in reducing some of the biggest barriers to inclusion of
such options in plans today. Specifically, the Council recommends that DOL
provide additional guidance to encourage plan sponsors to offer lifetime income
options, including an updated defined contribution plan annuity selection safe
harbor; and look for additional ways to make useful tools available, including
the DOL’s Lifetime Income Calculator, and
integrate existing tools such as My Social Security.